Many prospective homebuyers overlook the process of checking their credit report prior to applying for a loan. The information in your credit report can affect your interest rate, your down payment, or whether or not you can even buy a home.
Mortgage lenders want to know they will be repaid. Your credit report, which is a detailed record of your credit history, helps lenders determine a potential buyer's ability to repay their loan. Usually, mortgage lenders put the most emphasis on the following aspects of your credit report:
- Past payment history
- Current debts
- Length of credit history
- Number of new credit accounts you've opened or applied for
- Types of credit you have
How Can I Get My Credit Report?
There are currently three companies that maintain credit information: TransUnion, Equifax, and Experian. You are entitled to one free credit report per year by going to AnnualCreditReport.com. However, this credit report will not give you a credit score. If you want your credit score, you'll likely have to pay an additional fee.
Each of the credit reporting agencies also give you the option to purchase the full report and score they maintain. There are also options to purchase a "3-in-one" report which is a detailed overview of the information and scores from each of the three agencies. Be cautious of "free reports" with hidden fees unless you prefer a monthly credit monitoring service fee.
By reviewing your credit report in advance, you can determine the possibility of obtaining a loan with a good interest rate before applying for your loan. You can also catch any errors that may hinder the loan process.
What Does My Credit Score Say About Me?
The information provided by the three credit reporting agencies is used to create your FICO score, which is a number from approximately 300 to 850. Lenders will use your credit score when considering you for a loan, and if it's considered good, you'll have an easier time getting approved. If it's considered bad, you'll have more difficulty getting approved for a loan and likely pay a higher interest rate and down payment than somebody with good credit. You can get all three of your FICO scores from myFico.com.
If each of your FICO credit scores is 760 or higher, your credit is considered excellent. If your FICO scores are between 700 and 759, your credit is considered good. If your FICO scores are less than 700, or if you don't know your scores but know your credit reports list negative items, then it's time to start rebuilding your credit.
Don't be surprised if you discover that the credit scores from each of the three agencies are different. In reality, all three of the bureaus offer FICO credit scores using the same formula. The difference in these scores is largely because the bureaus don't necessarily all share the same data. For example, one bureau may list more accounts for you than another. Because these differences are common, it may be beneficial to pull and examine your credit reports from all three bureaus before you apply for a mortgage loan.
How Can I Fix Errors on my Credit Report?
There are generally two types of errors you might see on your credit reports:
- Inaccurate information which might include errors with your personal information or account information that is not yours. For example, if your credit report reflects a store credit card you know you never opened, then that error needs to be fixed immediately. It could be a data mix-up, or it could be a sign of identity theft.
- Accurate information that should have already expired from your report.
One study states that 79% of credit reports reviewed had some form of error in them.
The Internet has made the process of fixing errors convenient, and the government has regulated the process. When you dispute information on your credit report, the reporting agencies are required to investigate the dispute in a timely fashion. If they find that your dispute is legitimate, or if they are unable to verify the item one way or the other, they must remove said item from your credit report.
Hiring a credit repair company to handle this process for you isn't recommended. They generally charge you a large amount to do what you can easily do yourself.
What Can I Do to Improve My Credit?
Items that hurt your credit score are:
- Outstanding (unpaid) debts
- Late payments
- Credit card balances near the credit limit on those cards
- Liens (both outstanding and paid)
Depending on what it is, negative information can stay on your credit report for seven to ten years. A bankruptcy filing must come off after 10 years. All other information including civil suits, judgments, collection accounts, and any other adverse items come off after 7 years from the date of delinquency. It's possible for these items to last longer than the law allows, so it's important to review your reports once each year to make sure items are removed when they are supposed to be.
To maintain good credit or improve bad credit, follow these tips:
- Don't close accounts. Having too many open accounts can hurt your score, but once you've opened the accounts, you can't repair your credit report by closing the account. When you close accounts, your total available credit shrinks. Closing older accounts can also make your credit history seem younger than it actually is.
- If you want to apply for credit, do so in a fairly short period of time. The FICO score treats multiple inquiries in a 45-day period as just one inquiry and ignores all inquiries made within 30 days prior to the day the score is computed.
- Correct all errors on all three reports.
- Pay all your bills on time.
- Be consistent in paying down your debt.
- Apply for credit sparingly.